Capital allowances and HMRC consultation

The government reviewed the capital allowance legislation with a view to changing the way in which businesses obtain tax relief for qualifying capital expenditure earlier this summer.

The mini-Budget and subsequent Autumn Statement were both silent on the subject of the capital allowances consultation and focused more on the change/reversal of tax rates and thresholds aimed at repairing the UK’s finances.

We therefore expect any future changes to the capital allowance legislation following the response to HMRCs consultation in a future Budget, which could be in spring 2023.

What can we expect in the forthcoming months following HMRC’s consultation on capital allowances earlier this year?

Policy options in relation to the change in tax relief

Annual Investment Allowance (AIA)

The government has been exploring the option of keeping the level of AIA at £1,000,000, which has been in place since 1 January 2019.

In the mini-Budget it was announced that £1,000,000 would be the new permanent level of the AIA and that that the level would not revert to £200,000 from 1 April 2023 as previously announced.

This permanent level of £1,000,000 remains intact following the 17 October statement by the new Chancellor.

The permanent level of AIA at £1,000,000 will simplify the capital allowance computations of businesses.

Furthermore, the special rules regarding the pro rata of the AIA across two differing allowance limits during an accounting period will not now be required until there is a subsequent change in the level.

Writing down allowances (WDAs)

The government is exploring the option of increasing the rates of WDAs. These could potentially increase main rate allowances from 18% to say 20% and special rate allowances from 6% back to 8% which was the special rate from April 2012 to April 2019.

The increase in rates of WDAs will accelerate tax relief but require businesses who do not have a 31 March year end to pro rata their WDAs and calculate a hybrid rate for the accounting year in question.

Example

If a business has a 31 December year end and the main rate changes from 18% to 20% from 1 April 2023, the hybrid rate for qualifying expenditure within the main rate would be 19.5%.

For the period, 1 January 2023 to 31 March 2023, 3 months of the year at 18%, 3/12 x 18%. For the subsequent period, 1 April 2023 to 31 December 2023, 9 months of the year at 20%, 9/12 x 20%.

Full expensing

A fairly radical idea that has been put forward by the government has been full expensing of qualifying capital expenditure. This would mean that businesses would obtain 100% relief in the year of acquisition.

It is worth noting that the Office of Tax Simplification (OTS) reviewed the possibility of full expensing back in June 2018 and were against this. The OTS concluded that while this option has long term benefits it would be very disruptive in the short term by changing a system of which many people are familiar.

First year allowances (FYAs)

FYAs at 100% are currently only available on zero emissions/electric cars and the associated charging equipment and gas refuelling stations.

The option proposed by the consultation is to include FYAs at 40% for expenditure on qualifying plant and machinery and FYAs at 13% for special rate plant and machinery.

The additional tax relief available would be particularly attractive for mixed partnerships; they are currently not able to claim the AIA. For other businesses this would be an incentive to invest in capital expenditure in addition to the level of the AIA each year.

How can we help?

Our specialist tax advisors have knowledge and experience in completing timely and efficient capital allowance claims. We consider the commercial objectives of the business and the maximum tax relief available. We can assist at the planning, calculation and review stages of a capital expenditure project.

For more information, get in touch with Nicky Owen or your usual Crowe contact.